Cagey bosses don’t have the last word

Equivocation is the art of concealing the truth with ambiguities. If the CEO is working on an “exciting initiative”, employees will fear the worst. If a finance director congratulates an analyst on a “fair question”, the scribbler knows no clear answer will be forthcoming. Linguistic analysis is the cool new frontier. Processing wodges of text could be a way of quantifying sentiment and predicting where stock prices are headed.

Last week Morgan Stanley published findings after machine-reading 135,000 of its own research notes. It claimed it found a positive correlation between sentiment in the reports and how shares performed subsequently. Analysts might say what they mean — except, perhaps, when assigning a “hold” rating to a stock that is a screaming sell. C-suite bosses can be more slippery.

Inevitably, a US tech start-up thinks it has found a solution. Amenity Analytics has built a website that trawls through transcripts of earnings calls and awards scores to companies meant to show how prone executives are to stonewalling. Bank of America researchers used this database to create a model portfolio of shareholdings in straight-talking businesses and short positions in evasive ones. Adjusted for executive optimism, this beat the market by more than 6% a year in back tests.

Amenity provocatively calls the results of its scoring a “deception” rating. But some of the phrases Amenity classes as “deceptive” could simply denote clueless honesty —“I don’t know”, for example.

Lex has often come away from what felt like a frank one-hour chat with a CEO only to find nothing usable in the notebook. Advance notice of that risk via Amenity and rival services will be useful. But it seems doubtful obfuscation ratings will reliably predict stock prices. The advisers who teach CEOs to say “the real question is this ...” can teach them not to say it too. /London, October 21 © The Financial Times Limited, 2019